parabolic tech uptrend, didn’t allow them to lock in profits and exit their
positions. Using trailing stops would have helped them exit and keep large gains
instead of riding their tech stocks all the way back down.
In March of 2009 all major stock indexes made lows that seemed impossible just
a year before. The selling escalated because of a fear of holding equities, and
sellers were willing to let go at ridiculously low prices. Long-term trend traders
should have been out of the long side of stocks and limited losses in 2008 using
any reasonable sell.
The easiest sell signal for a trader or investor to use to limit the destruction of
their capital is to exit their holdings and go to cash when the S&P 500 index
tracking ETF SPY closes under its 200-day simple moving average. For stock
indexes, this one simple exit signal decreases drawdowns of capital by about
50% in the past 15 years of backtests. It doesn’t increase the returns in most
cases, but exiting when the 200-day simple moving average is lost will cut the
down side in half.
You have the option to be in cash during market corrections, bear markets,
recessions, and market meltdowns, and you can wait to start buying again when
the indexes start closing over the 200-day.
This could be the most important
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